The Economics of Financing Ph.D. Students as Company Contractors

Occasionally companies approach me with the following proposal: If I’m willing to supervise one of their employees for an external Ph.D. thesis, they’ll pay into my University budget an annual lump sum, typically something like EUR 10000. I almost always reject such proposals, unless I can change some of the critical terms, because these proposals are highly problematic. To understand this, please follow along.

The company does the following math: They’ll hire someone with a recent Master’s degree, typically for a research project at the company and on a contractor basis. Then, they’ll promise the contractor that he or she can use some of their time to complete a dissertation, because they argue the project will provide enough research substance. To prove this, they’ll use the professor to confirm to the contractor that they will take them on as a Ph.D. student. A going rate for such type of contractor is (a surprisingly low) EUR 2000 per month. Times twelve months + the professor’s lump sum makes EUR 34000 per year for the company (ignoring company overhead). The official cost of a Ph.D. student at a Bavarian University is EUR 75000. Voila, the company just saved EUR 41000 a year (ignoring other University costs). However, the contractor is much worse off, because no social duties are being paid for them.

Economically speaking, the value of the supervisory work of the professor to the company is the full university cost (EUR 75000) less the contractor’s salary. Assuming the contractor’s willingness to work for EUR 2000 per month no social duties paid, that value is EUR 51000 per year. Even if the contractor manages to negotiate more, say EUR 3000 per month, the value of the supervisory work only goes down to EUR 39000. Thus, it is only moral for the professor to accept the company’s proposal if this is what the company pays into their budget. Why? Because then it becomes cost neutral to the company: The company is not making a profit by reselling the professor’s willingness to supervise the contractor.

I still don’t advise this scheme. For one, the contractor is just that, not an employee, and hence is missing out on employee benefits and social duties. A professor who accepts the deal sells his willingness to supervise to the detriment of the contractor and the German state. Ultimately, it is a cross-subsidy from the state of Germany to the company by way of a (mostly harmless) professor.

More importantly, however, to the contractor the deal is money + Ph.D. title. However, no professor in their right mind will guarantee the contractor a Ph.D. title. So the conflict of interest is very clear. The first time the professor says no to an inadequate dissertation, he or she implicitly breaks the deal, as the company’s promise to the contractor just disappeared. Given that professors like to keep the money flowing, they are being nudged to lower standards and accept sub-par dissertations from the steady stream of contractors the company is willing to fund. To that conflict of interest, I just say no.

The proper way is how Universities in Germany have handled things in the past (and are still doing so): Acquire project contracts from companies and hire students for that project work. The company only sees the project deliverables and makes no promises for a Ph.D. title to anyone. The professor only hires people for the project work and it remains up to the student to convert this into an acceptable dissertation. No promises are being sold and that’s how it should be.